Student loans are easier than ever to get discharged in bankruptcy. You should still try these 5 alternatives first

The student loan delinquency rate has hit nearly 25%, according to a 2026 report by The Century Foundation. But borrowers looking to discharge their loans in bankruptcy may be in a better position than they realize.

In 2022, the Departments of Justice (DOJ) and Education (DOE) streamlined the process for federal student loan discharges in bankruptcy proceedings, allowing borrowers to submit a written attestation of their financial status rather than undergo the usual lengthy legal process.

The results have been dramatic. An analysis in the American Bankruptcy Law Journal (ABLJ) by University of Utah law professor Jason Iuliani found that, in 2023, borrowers who attempted to discharge their federal student loans in bankruptcy succeeded 87% of the time, up from 61% in 2017 and 39% in 2007. 

Bankruptcy should still be approached with great caution, however. It can be complicated, expensive and have a long-lasting impact on your financial future. 

Traditionally, courts have used the Brunner test to determine undue hardship. It requires petitioners to demonstrate:

• A present inability to repay the loan while maintaining even a minimal standard of living
• A likelihood that the hardship will persist for most of the loan’s repayment period
• A good-faith effort to repay the debt

But the attestation form has simplified the process for outstanding federal loans: The 15-page document includes information on age, disability, employment and loan status that could make it easier for the DOJ to determine if you could feasibly pay your loans.

As a result, the DOJ has increasingly recommended discharging to bankruptcy judges. If a judge agrees, an applicant’s loans can be wiped out without their case ever going to court. According to DOJ data, 98% of cases decided by the courts between November 2022 and March 2024 “have provided debt relief through full or partial discharge”.

Knowledge of the new pathway for student loan discharge is still limited. In a 2025 interview, Iuliano, author of the ABLJ study, said that a “myth of nondischargeability” keeps the filing numbers low.

According to a separate study in the Emory Bankruptcy Developments Journal, fewer than 1% of bankruptcy filers with student loans sought discharge by the end of 2024, “indicating that many student loan borrowers in financial difficulty are not aware of this change.”

But even with improved odds of success, the bankruptcy process is time-consuming and expensive. There are multiple court appearances and attorney fees, which can run into the thousands of dollars. (Payment is required whether your petition is approved or not.) 

There is also the impact on your credit score.

 “A bankruptcy discharge of student loans generally stays on your credit history for seven years under Chapter 13 or 10 years under Chapter 7,” education expert Mark Kantrowitz told CNBC Select. “The impact on your credit score is severe, typically a drop of 200 points.” 

Bankruptcy discharge “should be considered a last resort,” Kantrowitz added. “After the borrower has considered [other options] that can provide relief for long-term financial difficulty.”

Available for federal student loans, income-driven repayment plans (IDRs) cap monthly payments at a percentage of your discretionary income. Depending on your income and number of dependents, you could owe as little as $0 a month.

IDRs are one reason it’s hard to discharge student loans in bankruptcy.

“You have to show the court that your student loans are an undue hardship,” Robert Farrington, founder of The College Investor, told CNBC Select. “It’s difficult to show paying zero dollars a month is an undue hardship.”

Starting July 1, 2026, IDR plans, including Income-Based Repayment (IBR), Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR), are slated to be replaced with a new Repayment Assistance Plan (RAP). Under RAP, any remaining balance is forgiven after 30 years of payments.

Existing IDR borrowers can stay on their current plans until at least July 1, 2028.

2. Student loan refinancing

If your credit score has improved or interest rates have gone down, refinancing your student loan can reduce your monthly payment and total interest over time. That may be enough to stave off bankruptcy.

Refinancing federal loans means turning them into private loans, which don’t qualify for the streamlined attestation process. It also removes access to IDR plans and other government-backed hardship benefits, as well as any future student loan forgiveness.

If you have excellent credit, however, you may qualify for better rates with private loans. For the 2026-2027 academic year, interest rates on federal student loans are fixed at 6.52% for undergraduate loans, 8.07% for unsubsidized graduate or professional loans and 9.07% for PLUS loans.

Private lenders also have terms ranging from 5 to 30 years, longer than the standard 10-year term on a federal student loan.

One of our top picks for private student loan refinancing, Earnest, has low rates and hardship options like pausing or reducing payments or temporary interest rate reductions for illness, unemployment and financial distress. 

Citizens Bank offers a 0.50% rate discount for customers who enroll in autopay, as well as temporary forbearance for economic hardship, unemployment, or medical expenses that can pause or reduce payments for up to 12 months (though interest may continue to accrue).

If you are considering refinancing, ask about hardship assistance options before signing a contract.

3. Deferment or forbearance

Both deferment and forbearance temporarily stop or reduce federal student loan payments. Because interest on Direct Subsidized Loans is paused during deferment, eligibility requirements are stricter: It’s usually only granted during in-school enrollment, unemployment or financial hardship. 

As a result of the One Big Beautiful Bill Act, loans disbursed on or after July 1, 2027, are subject to stricter guidelines: Economic hardship and unemployment will no longer be acceptable grounds for deferment and forbearance periods will be capped at a nine-month maximum during any 24-month period.

Some private lenders offer their own version of deferment and forbearance. If you are worried you may fall behind on your private loans, reach out to your lender now — your options will be much more limited once you’re in default.

4. Public Service Loan Forgiveness (PSLF)

If you work full-time in an eligible public sector job, public service loan forgiveness can wipe out the remaining balance of your federal student loan, with the forgiven debt not considered taxable income. You must make at least 120 qualifying payments under an IDR or standard repayment plan.

In March 2025, President Donald Trump signed an executive order directing the Department of Education to revise PSLF eligibility rules for organizations he claimed “harm our national security and American values.” 

The ultimate impact of that order depends on DOE implementation and potential legal challenges.

5. Debt settlement

Debt settlement companies work with creditors to reduce balances on unsecured debts, such as credit card bills and medical expenses. Some, like Freedom Debt Relief, will also work on private student loans on a case-by-case basis. 

Debt settlement is more likely an option if you’re already in default (90 days overdue for private loans or 270 days for federal loans) and private lenders are more likely to negotiate than the DOE.

Debt settlement companies claim they can reduce clients’ balances by as much as 50%. You’ll need enough cash to make a lump-sum payment to settle your balance and cover the settlement company’s fee, which usually ranges from 15% to 25%, depending on the consumer’s state of residence.

In addition, there can be significant damage to your credit score and the forgiven debt is usually treated as taxable income by the IRS.

Why trust CNBC Select?

At CNBC Select, our mission is to deliver high-quality service journalism and comprehensive consumer advice to our readers, enabling them to make informed financial decisions. Every student loan article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of student loans. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content independently of our commercial team and any outside third parties, and we pride ourselves on maintaining high journalistic standards and ethics.

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